Ch 5 The Statement of Cash Flows

Question 1

Classifying cash flows related to interest and dividends paid and received

Answer 1

In the textbook assume this unless otherwise stated:
Receipts of interest and dividends - operating activities.
Payments of interest - operating activities.
Payments of dividends - financing activities.

Question 2

Advantages of the indirect method

Answer 2

• It is simpler to prepare.
• It uses information available in most accounting systems.
• It provides a linkage between net income and cash flows from operating activities.

Question 3

Common cash flow challenges

Answer 3

• significant increases in sales volumes
• lengthy cash-to-cash cycles
• undercapitalization (or inadequate financing)

Question 4

Solutions to common cash flow problems

Answer 4

• significant increases in sales volumes
  –Reduce the rate of growth
• lengthy cash-to-cash cycles
  –Shorten the cash-to-cash cycle
  —Decrease the credit period for customers
  —Buy on account from suppliers
  —Increase the amount of cash sales
• undercapitalization (or inadequate financing)
  –Increase the amount of capitalization
  —Issue more shares
  —Get a loan

Question 5

The most common cash flow patterns (Operating/Investing/Financing)

Answer 5

+/-/+
+/-/-

Question 6

(O/I/F) +/+/+

Answer 6

Successful, but actively repositioning or relocating using financing from operations together with cash from creditors and shareholders

Question 7

(O/I/F) +/+/-

Answer 7

Successful, mature company that is downsizing and returning capital to shareholders or repaying debt

Question 8

(O/I/F) +/-/+

Answer 8

Successful and growing, with growth partially financed by creditors and shareholders

Question 9

(O/I/F) +/-/-

Answer 9

Successful, with operating activities providing sufficient cash to finance growth and repay debt or pay dividends

Question 10

(O/I/F) -/+/+

Answer 10

Struggling, but using cash inflows from the sale of property, plant and equipment and new borrowings to remain in operation

Question 11

(O/I/F) -/+/-

Answer 11

Struggling and using cash from the sale of property, plant and equipment to repay creditors

Question 12

(O/I/F) -/-/+

Answer 12

A start-up or a struggling company that is able to attract financing for growth or reorganization

Question 13

(O/I/F) -/-/-

Answer 13

Struggling, but using existing cash balances to cover losses, purchase property, plant, and equipment, and repay creditors

Question 14

Operating Cash Flow Ratio

Answer 14

• One of the ratios used to assess a company’s ability to meet its liabilities through its operating cash flows
• Operating Cash Flow Ratio = (Cash flow from operating activities/Current Liabilities)
• The higher the ratio the better

Question 15

Free Cash Flow

Answer 15

*a non-IFRS financial measure
* the concept of free cash flow is to measure the amount of cash that a company generates from its operations that is in excess of the cash required to maintain the company’s productive capacity.
* Net free cash flow = Cash flows from operating activities - Net capital expenditures - Dividends on preferred shares

Question 16

Net capital expenditures

Answer 16

= (the total purchases of property, plant and equipment) + (the total purchases of intangible assets) - (proceeds from the sale of property, pant, and equipment) - (the proceeds from the sale of intangible assets)